Like Bill Gates, Warren Buffett is making a very big mark on philanthropy.

Warren Buffett, has decided to turn over most of his $44 billion fortune to the nation's richest man, Bill Gates. Buffett is committing to give about 10 million Class B shares in his holding company, Berkshire Hathaway, to the $30 billion Bill and Melinda Gates Foundation.

To put this in perspective the Rockefeller Foundation last year made $110.5 million in grants. The Gates Foundation gave out more than $1.3 billion in grants. Now, with Buffett's billions as well, the grant totals will be even higher. The interesting bit is that Buffett is determined to get his money's worth in philanthropy just as he has with other investments.

Creating and operating a foundation to house, manage, and give away significant sums can be an expensive proposition. You have to rent office space and hire executives, accountants, program officers, and support staff. In its most recent annual survey, the Chronicle of Philanthropy found, for example, that the Rockefeller Foundation last year made $110.5 million in grants and spent $30.5 million—27 percent of that total—on administrative costs. The Gates Foundation is far more efficient, although it doesn't appear in the Chronicle's survey. Last year it gave out more than $1.3 billion in grants and reported management expenses of $42 million. . . . It costs money to give away money. Buffett hates to spend money unnecessarily. By transferring funds to the Gates Foundation, as Buffett told Fortune's Carol Loomis, he's avoiding the annoyance and expense of building a philanthropic infrastructure.

Shrewd. But that's just part of it.

But while he's willing and eager to outsource management, Buffett has proven utterly unwilling to outsource money management. Buffett is sharing his wealth but controlling it. The outside investors who manage the Gates Foundation's $30 billion endowment are very conservative. Gates has asked the managers to target a 5 percent return each year—so that it can have enough to money to pay out 5 percent of its assets each year, as mandated by the government, without dipping into the principal. The foundation's 2005 financial statement shows that about two-thirds of the assets are in bonds.

Buffett has effectively cut these managers out by keeping the donation in his hands for as long as possible. Buffett has little patience or use for professional money managers. . .

In this year's letter to shareholders, Buffett railed against the group of parasitic professionals he dubbed "Helpers"—brokers, consultants, hedge-fund and private equity managers who help themselves to fees and shares of the profit. And Buffett has structured his donations to keep his money out of the hands of any Helpers—and to buy more philanthropy per donated buck. Instead of giving a lump sum to be managed as part of an endowment, Buffett has committed to give the Gates Foundation a chunk of Berkshire Hathaway stock each year. Based on his track record over 40 years, he believes he can do a heck of a lot better than 5 percent per year and thus generate more cash for philanthropy.

What a heart warming story. He's giving it all away and doing his best to see that the gifts actually get to the targeted spots rather than being drained away by operational costs and financial management parasites. It isn't only that this is effective and generous, it may be that this is a beginning for long over due reform in the philanthropy business. Can wasteful and ineffective foundations like Rockefeller that squander such huge amounts on administrative costs continue as they have? Will the individual grant recipients - notoriously wasteful of their grants on administrative costs - clean up their acts too?

Perhaps you recall some discussion of this problem in recent years - especially about the time of the tsunami - and how one must be careful where money is donated if you actually care about doing good works. It's not as simple as the efficiencies noted above - the percentage of funds that are drained away in administrative overhead - or even the management of the endowment that so concerns Buffett. Another important consideration is the effectiveness of the grants, the net benefit. It does no good to squander money efficiently on foolish projects.

It seems to me that in the past such considerations were for the most part ignored, that charities were understood to be inefficient and ineffective, serving mainly as jobs programs and causes for those who have no marketable skills but are members of the right class, often relatives or school mates of the wealthy and famous, and their minions. At the international level the UN's "Toyota Taliban", disgustingly ostentatious and ineffective bureaucrats and field operatives, are well known for lounging in luxury while those who need assistance continue to suffer unassisted.

It may be too much to hope for but Gates and Buffett have some influence and seem to be setting an example that will be difficult to ignore. Large amounts of grants from well managed organizations could make a difference beyond the direct benefits of those grants. They might remake the field.

Update:

Becker seems very confused, though perhaps it's more a matter of poor writing than poor thinking. One would hope.

Private giving to various causes is a substitute for public giving . . .

That's backwards. Public giving is a substitute - a very poor one - for private giving. That private is better as well as a more traditional social behavior is clear to Becker.

. . . private giving tends to be more effective because of the competition among different foundations and other charities. In this respect I believe the US market for giving is much better than the European approach because financing of the arts, higher education, hospitals, and many other activities to a considerable extent comes from governments in Europe, while in the US these activities much more depend on fees for services and private donations. Competition among private donors is as conducive to efficiency and productivity growth in these fields as is competition among producers of cars and other such goods.

Buffett did something clever not covered in the original post.

Warren Buffett believes in capitalism and competitive markets, but he is not a "conservative". Still, he is concerned that over time his huge gift would be used in ways that he would not approve. So he is following the example set by Olin and a few other foundations, and he is installing a sunset provision that would require all his charitable assets to be spent by the time the Gates" have either died, or withdrawn from an active role in their foundation.

This is to avoid the degeneration that has happened in many foundations (Ford, Pew etc.) after the death of the original donor. The types of people who work in foundations are not the type who could ever make a fortune, or that understand the functioning of society, so the foundation loses its way under thier direction.